Employee capital plans – tax aspect

The pension protection system in force in Poland provides for three pillars. first is the State security guaranteed by the Social Insurance Fund [1], second – the capital scheme of the Open Pension Funds (now in residual form), third In turn, various types of formalised (e.g.

as part of Individual Pension Accounts, Individual Pension Insurance Accounts and Workers Pension Schemes) and informal forms of voluntary retirement savings.

The legislator, seeing the relatively low interest in the savings in the 3rd pillar, especially in the context of the changes made in the OFE over the last few years, considered it appropriate to introduce a new solution that meets the expectations of the pension protection system.

To this end, the Act on 4 October 2018 on employee capital plans [2]. The following article discusses tax issues concerning these plans.

Preliminary remarks

Employee capital plans (hereinafter PPK) are a form of saving under the third pillar, combining the characteristics of voluntary participation with some kind of actual incentives (automatic record, though with the possibility of resignation) and financial support (financial support in the form of welcome payments and annual payments) which are intended to encourage as many people to remain in the system. The PPK system is generally applicable from 1 January 2019, However, due to the deferred obligations of employers, the choice of financial institution and the signing of agreements for the operation of PPK, in practice this system will be implemented throughout the whole 2019

The introduction of the PPK reflects many aspects of the economic life of both employers and workers. Consequently, the transitional provisions of u.p.k. amended the following tax laws:

• 1) in the Act of 28 July 1983 on inheritance and donation tax (hereinafter u.p.s.d.) [3],
• 2) in the Act of 26 July 1991 on income tax on natural persons (hereinafter referred to as ‘the tax’) [4],
• 3) in the Act of 15 February 1992 on corporate income tax (hereinafter referred to as corporate income tax) [5],
• 4) in the Act of 11 March 2004 on tax on goods and services (hereinafter: the VAT Act) [6].
• 5) in the Tax Act on certain financial institutions (hereinafter u.p.i.f.) [7].
• 2. Tax on inheritances and donations

As with other forms of retirement savings under the third pillar of the pension protection system, such as EPP, IKE and IKZE, also in the case of PPK in the event of the death of a participant of that system, the funds collected on the PPK are allocated to its heirs, in accordance with the general rules laid down in the Act of 23 April 1964 Civil Code (hereinafter c.c.)[8], unless the saver (participants of PPK) enjoys his right and indicates the person entitled in the event of death.

Receipts by inheritance are generally not tax-neutral, since according to Article 1(1) u.p.s.d. is subject to inheritance and donation tax.

In the event of the death of a participant in the PPKP, the funds collected in the PPKP account will be distributed between the deceased spouse and other eligible persons, i.e.:

• 1) persons indicated in accordance with Article 21(1) u.p.p.k. as entitled to receive cash after the death of a participant in the PPK;
• 2) persons under Article 832k.c. where the PKK is operated in the form of insurance;

3) The heir. According to Article 86(2) the funds collected on the PCP account of the deceased participant, depending on the request of the authorised person, may be distributed in one of the following ways::

• 1) are subject to a transfer payment to the PPK, IKE or EPP of that person,
• 2) they are returned in monetary form.

A transfer payment to the PPK, IKE or EPP account of an authorised person shall not be subject to inheritance and donation tax. It constitutes tax revenue taxed on income tax on individuals. However, the legislator decided to exempt such transfer payments from this tax (see point 3.1.3. This Article).

In the case of reimbursement of funds from PPK in monetary form, on the part of the heir there is a tax liability in inheritance and donation tax. However, the legislator considered it appropriate to exempt funds obtained under the title of inheritance from the PPK from taxation. Therefore, the transitional provisions to u.p.k.

provided for the introduction of under Article 3(4a) u.p.s.d. a new exemption from this tax. According to this provision, tax exempt from inheritance tax and donations is the acquisition by inheritance of funds from the ICP according to u.p.k.

3. Personal income tax

The u.p.d.o.f. is foreseen three groups of issues which have been introduced by the transitional provisions of the Polish Public Security Agency. first refers to the catalogue of redundancies of participants of the PPK, second the possibility of recognising the cost of obtaining revenues by employers operating PPKs, third and the rules on taxation of funds paid out from the participant's PPK account.

3.1. Exemptions

The PPK system in terms of organisation and rules on depositing and saving funds in the account or having them in the event of the participant's death, provides for similar arrangements to the existing savings schemes under the third pillar, as provided for by the EPP, IKE and IKZE system. Therefore, tax arrangements for tax exemptions – taking into account the specificities and specificities of PPKs – are similar to the already existing exemptions for those other savings schemes under Pillar III.

3.1.1. Release of welcome payment and annual payments

PPK regulations provide for voluntary participation in the system by enabling participants enrolled in the system to withdraw from it.

At the same time, the legislator provided financial incentives to convince participants to remain in the system, which include the financing by the State Treasury of a welcome payment (Article 31 u.p.k.) and annual payments (Article 32 As a rule, such benefits, like any other cash benefits, constitute tax revenues on the part of participants of the PPK, as they meet the condition of tax delivery within the meaning of Article 11ust.

1 u.p.d.o.f. However, the legislator has decided to exempt these amounts from revenue, introducing to the catalogue of exemptions included under Article 21ust. 1 point 47 f u.p.d.o.f., amounts received by the taxpayer of welcome payments and annual payments.

As a result, the welcome payment and annual payments received by the PPK participant are tax-neutral.

1. 1.2. Amounts received by the spouse and persons entitled to reimburse the staff capital plan of the deceased participant

The essence of PPK is to collect savings in order to secure the participant's financial needs for old age. However, in the event of a participant's death, the funds collected on the PPK shall be held in accordance with the rules provided for under Article 85 and 86 u.p.p.k.

If at the time of his death a PPK participant remained married, the selected financial institution shall pay the transfer of half of the funds collected on the PKK account of the deceased PPK participant to the PKK, IKE or PPE account of the deceased PPK participant, in so far as those funds were the subject of the marital property union.

At the request of the spouse of the deceased PPK participant, the reimbursement of the funds collected on the PKK account of that spouse may take place in monetary form.

Recovery shall take place within the time limit 3 months from the date of submission of proof that the funds collected from the PPK account of the deceased PPK participant have been allocated to that spouse (Article 85(4) u.p.p.k.).

According to Article 86(1) funds collected on the PPK account of the deceased PPK participant, which will not be transferred according to Article 85 u.p.p.k., shall be transferred to entitled persons. According to Article 2(1)(17) u.p.p.k.

by the entitled person, one of three persons: 1) person indicated by the PPK participant in mode Article 21u.p.p.k., which after his death is to receive funds collected on the PPK; 2) person entitled in accordance with Article 832(2) k.c.; 3) The heir.

Depending on the request of the authorised person, the funds collected in the PPK account of the deceased participant shall be transferred to the PPK, IKE or PPE of that person or shall be returned in cash. The reimbursement may relate to all or part of the funds collected in the PPK account of the deceased PPK participant.

The cash benefits described above for the reimbursement of funds collected in the account of the deceased PPK participant would in principle constitute, in the case of both the spouse and the entitled person, tax revenue.

However, the legislator decided to exempt these funds by listing them in the list of tax exemptions under Article 21(1)(47g) u.p.d.o.f.

1. 1.3. Collection of appropriations on the staff account of the capital plan, payment of appropriations and transfer payment

The PPK system is essentially a capital scheme as money can be invested in certain forms of investment funds. As a general rule, the benefits obtained by clients of financial institutions resulting from the increase in the value of assets from the investment are tax revenue in accordance with the general rules applicable to the type of financial activity concerned. Thus, if it were not for specific tax regulations, the profits recorded on these investments under the PPK during the investment period would have to be taxed on capital gains. However, the legislator, as in the case of EPP, IKE and IKZE, provided for exemption from income tax on individuals who have so obtained profits. To this end, appropriate regulations have been introduced to Article 21(1)(58c) u.p.d.o.f. This provision exempts revenue from participation in PPK obtained in connection with:

• 1) the collection of funds to the PPK by the participant;
• 2) payment of funds collected in the PPK in cases specified under Article 97(1), subject to provision 30a; section 1, points 11a and 11b u.p.d.o.f.;

1. the transfer payment of funds collected in the PPK. It should be added that according to Article 2(1)(41) u.p.k. by payment shall be understood as payment made at the request of a PPK participant to pay the funds collected in the PPK to the specified bank account or account in the SKOK if the conditions set out in this paragraph are met. Under Article 97 u.p.k. These conditions are submission of an application and, in principle, completion 60. one year of age (by way of exception, it is possible to pay all the funds to cover the own contribution in connection with the purchase of immovable property or part of the appropriations in the event of serious illness of the participant, his spouse or the child). The reimbursement of the funds according to Article 2(1)(47) u.p.p.k. is the withdrawal of funds from the PPK without meeting the above conditions. The reimbursement of funds from the PPK does not benefit from the tax exemption is taxed in accordance with Article 30a(1)(11d) u.p.d.o.f. 19% Capital gains tax.

Attention should be paid to the exceptions here under Article 30a(1)(11a) and 11b u.p.d.o.f., i.e. the income of the PPK participant is taxable:

1. received in connection with payment to the extent that the participant has not reimbursed the funds paid within the time limit resulting from the contract concluded under Article 98u.p.p.k. with selected financial institution on a one-off payment to 100% the value of the funds collected in the PPK, in order to cover the own contribution in connection with the borrowing to finance the construction of the residential building and the acquisition of property rights of the apartment;
2. for the performance of the participant 60. year of age, wages 75% funds collected in the PPK in 120 monthly instalments where the instalment is less than 10 years (according to Article 99(1) s.p.k. payment appropriations from the ICP shall be paid only in 25% by one-off payment and the other 75% – in the form of monthly instalments spread over at least 10 years. Therefore, if a PPK participant requests that the remainder be paid in instalments spread over a shorter period or once, then it must be subject to the obligation to pay capital gains tax on that part.

According to Article 2(1)(42) u.p.p.k. by transfer payment shall in principle be understood to transfer funds from one PPK account to another PPK account (and specific transfers between PPK and other forms of savings under the third pillar).

The transfer payment – as a provider of long-term savings for retirement – also benefits from a tax permit under the above-mentioned provision. This regulation can be summed up by the fact that the legislator exempts such payments and transfers (transfer payments) which implement long-term savings assumptions in the PPK system, i.e.

essentially having funds until the participant obtains at least 60. years of age. However, the tax exemption does not benefit from the withdrawal of measures in circumstances where the condition for saving at least 60. the age will not be fulfilled.

In such a case, the withdrawal of funds shall constitute a reimbursement of the funds from the PPK, which shall be taxed as provided for under Article 30a(1)(11d) u.p.d.o.f. (see point 3.3. This Article).

3.1.4. Tax exemption for specific cases of payments from the staff capital plan

Under Article 21(1)(58d) u.p.d.o.f. a new exemption has been introduced which refers to the withdrawal from the savings account or the forward deposit account referred to Under Articles 80(2) and 102(3) u.p.p.k.

according to Article 80(1) u.p.k., if the marriage of a PPK participant has been terminated by divorce or has been cancelled, the funds collected on the PKK account of the PPK participant, belonging to the former spouse of the PPK participant as a result of the division of the assets of the joint spouses, shall be transferred in the form of a transfer payment to the PKK account of the former PMK participant.

However, according to Article 80(2u).p.p.k., where the former spouse of a PPK participant is not a party to the agreement to set up the PPK, the funds collected on the PKK account of the PPK participant resulting from the division of the assets of the joint spouses shall be repaid in cash or shall be transferred in the form of a transfer payment to the future savings account designated by the former spouse of the PPK participant or to the fixed-term investment account held at the PKK, provided that they are paid after the former spouse has reached the PPK participant 60.

years of age.

This condition of payment after the ex-wife has reached 60. the year of life is crucial, since only then will the payment made from the savings account or from the fixed-term investment account benefit from the tax permit under the above Article. 21 section 1 point 58d u.p.d.o.f.

Otherwise, if the spouse of the deceased PPK participant paid funds before reaching the above threshold 60 years, then such payment will be taxed under Article 30a(1)(11e) u.p.d.o.f. Article 102(1)(2) u.p.p.k.

transfer payment shall be made, among others, to the account of a timely savings deposit or a contract to hold a forward deposit account. Payment of funds from such a deposit also benefits from tax exemption under Article 21(1)(58d) u.p.d.o.f. However, when the participant makes a payment from the deposit, then, under Article 30aust.

1 point 11f u.p.d.o.f., they are taxed19% by flat-rate tax.

1. 2. Operating costs of employee capital plans as the cost of obtaining employer's income

According to Article 22(1ba) the costs of obtaining revenue are also incurred by the employer within the meaning of u.p.p.k. to ensure the proper performance of the obligations arising from u.p.p.k. Provision Article 22(1ba) u.p.d.o.f.

does not specify directly the list of expenses which may be the cost of obtaining revenue from the above. However, there should be no doubt that the cost of basic and additional contributions may be such a cost, since according to Article 25(1)(2) u.p.p.k. the employer is obliged or entitled to submit them.

These costs will also include the costs and fees associated with the implementation of this obligation, such as the costs of bank transfers relating to PPK premiums paid, the costs of printing and distribution to employees of PPK contracts and information on the rules of operation of PPK, as well as the costs of legal support related to the creation of PPK.

The need for an individual indication that the costs associated with the proper implementation of the PPK constitute the costs of obtaining revenue, it follows from the fact that, in principle, these costs do not relate to the employer's income, but are unilateral benefits to employees, which are not of the nature of remuneration for work.

Therefore these expenditure does not meet the basic condition of Article 22(1) u.p.d.o.f., which is the link between the expenditure incurred and the income of the entity bearing the cost.

However, the legislator considered it appropriate to allow employers who operate the PPK to be credited with the costs of obtaining revenues for the implementation of the PPK.

As indicated above, contributions financed by the employer represent in principle the cost of obtaining revenue, but one should mention here two fundamental reservations. first the reservation has been regulated under Article 22(6bc) u.p.d.o.f.

In accordance with this provision, contributions paid by the employer to PPK are the costs of obtaining revenue in the month in which they are due, but the condition for crediting the costs of obtaining income paid by the employer of contributions is that they are discharged within the time limit specified in u.p.k.

In the event of failure to comply with this deadline, the provisions shall apply to these payments. Article 23(1)(55) aa u.p.d.o.f., according to which they do not represent the cost of obtaining revenue of unpaid contributions to the PPK.

A contrario can therefore be concluded that if there is a delay in the payment of the contribution to PPK, it does not lose the advantage of the tax cost, only that this cost can be deducted only in the settlement for that period, during which the actual payment of that contribution takes place.

second The reservation was, on the other hand, regulated under Article 23(1)(37a) u.p.d.o.f. According to this provision, they do not constitute the cost of obtaining income payments made to PPK on prizes and bonuses paid from income after tax on income tax.

3.3. Principles of taxation of employee capital plans

The essence of PPK is to encourage individuals to make additional savings for retirement. In order to encourage the establishment and continuation of savings, two groups of preferences – financial (welcome and annual payments) and tax.

According to Article 21(1)(58c), The tax preferences consist of tax exemptions from the payment of funds from PPK.

It is worth noting here that the payment is a withdrawal of funds collected on the PPK, but only subject to the formal conditions specified under Article 97u.p.p.k., of which the primary is essentially completion by the participant 60, age (see point 3.1.3. This Article).

The reimbursement of the funds from the PPK, which is the withdrawal of funds from the PPK without meeting the above conditions, should be distinguished from payment.

Reimbursement is carried out on the basis of Article 105 u.p.p.k. but does not benefit from tax exemption and is taxed according to Article 30a(1)(11d) u.p.d.o.f. Article 30a(15) u.p.d.o.f.

the taxable tax income shall then be the amount of the refund on the redemption of units or the redemption of units, less the expenditure on the acquisition of purchased units or the payment of the redeemed units from which the refund was made. Regulation included under Article 30a u.p.d.o.f. refers to taxation 19% flat-rate income tax.

This tax is collected by the tax payer under Article 41(4) u.p.d.o.f. In addition, special editorial units Article 30a u.p.d.o.f. tax 19% the flat-rate income tax levied by the payer also special cases.

Table 1. Events related to PPK, subject to income tax on individuals

4. Changes in corporate income tax

Transitional provisions to u.p.k. introduced 1 January 2019 In the Corporate Income Tax Act the following amendments:

1. the costs incurred by the employer to ensure the proper performance of the obligations resulting from the u.p.k. constitute a CUP when they become due, but provided that they are paid by the employer within the deadline resulting from the u.p.k. (this results from the newly added Article 15(1da)(4) gau.p.d.o.p.);
2. the revenue costs were excluded from the employer's contribution to the PPK from the prizes and premiums paid from income after tax (this results from the newly added Article 16(1)(40) a and 57 aa the Corporate Income Tax Act).

Since the above changes are analogous to the changes made to the costs of the entity employing employees participating in the PPK, the above changes were made to the comments. Under point 3.2. This Article.

5. Changes in the tax on goods and services

Transitional provisions to u.p.k. have also been introduced (from 1 January 2019) changes in the VAT Act They serve to extend the scope of the current exemption for the provision of management services for individual types of funds to the management of PPKs. This issue is regulated Article 43(1)(12) point (g) the VAT Act

6. Changes in the tax on certain financial institutions

According to Article 9 u.p.p.k. an agreement to run the PPK may be concluded with one of the following financial institutions, i.e. with:

• 1) investment fund company,
• 2) a general pension society,
• 3) an occupational pension society,
• 4) an insurance company.

Of these institutions, only insurance undertakings are subject to tax on certain financial institutions. The essence of this tax is to tax the assets of a financial institution at a flat rate. For insurance undertakings, their assets are taxed at a rate 0.0366% the tax base.

If there were no changes in the u.p.i.f., we would be faced with unequal competition between PPK providers, as the assets of insurance undertakings collected by offering PPK would be subject to tax on some financial institutions, but the assets of other institutions that could operate PPK would not be subject to this tax.

The legislator, in order to maintain a level playing field between these entities, decided to introduce a regulation whereby, in the case of insurance undertakings, the tax base is reduced by the value of assets collected under the PPK agreements. Article 5(10) u.p.i.f., which has been introduced into the legal order 1 January 2019 under transitional provisions u.p.k.

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